Corporate Governance, Economic Entrenchment and Growth

65 Pages Posted: 9 Sep 2004 Last revised: 30 Jan 2013

See all articles by Randall Morck

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Daniel Wolfenzon

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2004

Abstract

Around the world, large corporations usually have controlling owners, who are usually very wealthy families. Outside the U.S. and the U.K., pyramidal control structures, cross shareholding and super voting rights are common. Using these devices, a family can control corporations without making a commensurate capital investment. In many countries, such families end up controlling considerable proportions of their countries'' economies. Three points emerge. First, at the firm level, these ownership structures vest dominant control rights with families who often have little real capital invested creating agency and entrenchment problem simultaneously. In addition, controlling shareholders can divert corporate resources for private benefits using transactions within the pyramidal group. The result is a poor utilization of resources. At the economy level, extensive control of corporate assets by a few families distorts capital allocation and reduces the rate of innovation. The result is an economy-wide misallocation of resources, and slower economic growth. Second, political influence is plausibly related to what one controls, rather than what one owns. The controlling owners of pyramids thus have greatly amplified political influence relative to their actual wealth. They appear to influence the development of both public policy, such as property rights protection and enforcement, and institutions like capital markets. We denote this phenomenon economic entrenchment. Third, we conceive of a relationship between the distribution of corporate control and institutional development that generates and preserves economic entrenchment as one equilibrium; but not the only one. Based on the literature, we identify key determinants of economic entrenchment. We also identify many gaps where further work exploring the political economy importance of the distribution of corporate control is needed.

Suggested Citation

Morck, Randall K. and Yeung, Bernard Yin and Wolfenzon, Daniel, Corporate Governance, Economic Entrenchment and Growth (August 2004). NBER Working Paper No. w10692. Available at SSRN: https://ssrn.com/abstract=579223

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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Bernard Yin Yeung

National University of Singapore - Business School ( email )

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Daniel Wolfenzon

Columbia Business School - Finance and Economics ( email )

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United States

National Bureau of Economic Research (NBER)

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